The Effect of Trade Liberalization on CEO Compensation

The research conducted in this paper tries to establish whether there is a link between trade liberalization and executive compensation. In light of recent criticism regarding free trade, it seems only adequate to take a closer look at the underlying mechanisms. Using a general equilibrium model, it is predicted that liberalization has two opposing effects on CEO compensation: A positive one caused by an increase in factor-market competition, and a negative impact caused by an increase in product-market competition. Making use of industry exports as a proxy for the former, and average industry tariffs as well as imports as proxies for the latter, I conduct an empirical analysis of the U.S. manufacturing sector that spans 25 years. The results indicate that while there appears to be a positive relationship between factor-market competition and total compensation, no such evidence is found when looking at the bonus component only. Additionally, there is also no conclusive evidence regarding the role of product-market competition for either total CEO compensation or the bonus.